THE PJM INTERCONNECTION STATE OF THE MARKET REPORT 2001

1. THE PJM INTERCONNECTION STATE OF THE MARKET REPORT 2001 Federal Energy Regulatory Commission June 26, 2002 Joseph E. BowringManager PJM Market Monitoring Unit

2. Energy markets: Reasonably competitive Capacity markets: Period of market power Subsequently reasonably competitive Regulation market: Competitive FTR auction market: Competitive State of the Market 2001-Conclusions

3. Basic tests of competition: Net revenue Price-cost mark up Market structure Prices Energy Markets

4. Net Revenue

5. Net Revenue

6. CT at $40/MWh 2001: $59,238/MW-year from energy market 2001: $36,700/MW-year from capacity market 2001: $7,126/MW-year from ancillary services and operating reserves 2001 Total: $103,064/MW-year CT at $50/MWh 2001: $44,386/MW-year from energy market 2001: $36,700/MW-year from capacity market 2001: $7,126/MW-year from ancillary services and operating reserves 2001 Total: $88,212/MW-year Annual Net Revenues

7. Conclusion 1999 net revenues from all sources greater than adequate to cover annual fixed costs of new peaker 2000 net revenues from all sources less than adquate to cover annual costs of new peaker 2001 net revenues from all sources greater than adequate to cover annual costs of new peaker Overall: net revenue results consistent with finding that there was no systematic exercise of market power in the energy market in 2001, while there was a finding of market power in the capacity market in 2001 Net Revenues

8. Mark up

9. Conclusion Mark up index calculations consistent with conclusion that energy market was reasonably competitive in 2001 Complexities: opportunity cost not included in cost Complexities: scarcity rent not reflected Mark-Up Index

10. FERC/DOJ HHI test: HHI < 1000 : Unconcentrated 1000 < HHI < 1800 : Moderately concentrated HHI > 1800 : Highly concentrated Energy Market Structure

11. Energy Market Structure

12. FERC/DOJ HHI test: HHI < 1000 : Unconcentrated 1000 < HHI < 1800 : Moderately concentrated HHI > 1800 : Highly concentrated Energy Market Structure

13. Conclusion Aggregate HHI results show that PJM energy markets are moderately concentrated Aggregate HHI results do not give reason for confidence during times of high demand HHI levels indicate highly concentrated segments of the supply curve at times HHI levels indicate highly concentrated markets in areas defined by specific transmission constraints Market Structure

14. Energy Market Prices

15. Simple average prices

16. Load Weighted Average Prices

17. Fuel Cost Adjusted Average Prices

18. Day Ahead/Real Time Average Prices

19. Day Ahead and Real Time LMP

20. Conclusion Energy prices in 2001 consistent with a competitive energy market Net imports provide source of competition Pattern of prices across hours illustrates potential for demand side price sensitivity Energy Prices

21. Conclusion Net revenue: energy market reasonably competitive in 2001 Price-cost markup: energy market reasonably competitive in 2001 Market structure: Moderate overall concentration High supply curve segment concentration High regional concentration Prices: energy market reasonably competitive in 2001 Recommendations Additional actions to increase demand side responsiveness Retention of $1,000 offer cap Investigate incentives to reduce incentives to exercise market power Energy Market

22. Basic tests of competition: Market structure Outage rate performance Prices Market power issue Capacity Markets

23. FERC/DOJ HHI test: HHI < 1000 : Unconcentrated 1000 < HHI < 1800 : Moderately concentrated HHI > 1800 : Highly concentrated Capacity Market Structure

24. Forced Outage Rates

25. Supply and Demand

26. Capacity Markets

27. Capacity Markets

28. Conclusion Capacity markets were subject to the exercise of market power in 2001 MMU identified issues and PJM modified rules to reduce incentive to exercise market power Concentration levels high Positive outage rate results Contribution to reliability Potential exercise of market power remains a concern Market design issues remain a concern Recommendations Continue competitive enhancements to capacity market design Adopt a single market design Incorporate explicit market power mitigation rules Capacity Markets

29. Basic tests of competition: Market structure Availability Performance Price Regulation Market

30. Regulation Market

31. Regulation Market

32. Regulation Market

33. Conclusion Concentration levels between 1700 and 1800 Supply substantially greater than demand Prices were moderate Performance improved after introduction of market and maintained level of performance in 2001 Regulation market was competitive in 2001 Recommendation Retain $100 offer cap in regulation market Regulation Market

34. Basic tests of competition: Activity levels Prices FTR Auction Market

35. FTR Auction Market

36. FTR Auction Market

37. Conclusion FTR auction market was competitive in 2001 FTR reassignment process constitutes a barrier to retail competition Recommendations FTR reassignment process should be modified to eliminate barrier to retail competition Develop an approach to identify areas where transmission expansion investments would relieve congestion where congestion may enhance market power and investments are needed to support competition FTR Auction Market

38. IF YOU HAVE QUESTIONS Contact the PJM Market Monitoring Unit • (610) 666-4536 Phone • (610) 666-4762 FAX • bowrij@pjm.com Email • www.pjm.com Internet